AUDITING THEORY

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. MARK THE LETTER OF YOUR CHOICE WITH A
VERTICLE LINE ON THE ANSWER SHEET PROVIDED. STRICTLY NO ERASURES ARE ALLOWED.

1. Which of the following best describes high level of assurance?

a. It refers to the professional accountant having obtained evidence based on procedures agreed upon between the
practitioner and the intended users to be satisfied that findings be reported to the intended users.
b. It refers to the professional accountant having obtained sufficient external and internal appropriate evidence to be
satisfied that the subject matter is plausible in the circumstances.
c. It refers to the professional accountant having obtained sufficient appropriate evidence to conclude that the subject
matter conforms in all material respects with identified suitable criteria.
d. It refers to the professional accountant having obtained sufficient evidence to conclude that he has no knowledge of
any required modifications to be made in the financial statements in order for them to conform of prescribed criteria.

2. Which statement is incorrect regarding assurance engagement risk?

a. Engagement risk is the risk that the practitioner will express an inappropriate conclusion that the subject matter
conforms in all material respects with suitable criteria.
b. All components of the engagement risk model will be significant for all assurance engagements.
c. The extent to which the practitioner considers the relevant components of engagement risk will be affected by the
engagement circumstances.
d. Business risk is not part of engagement risk and does not affect the application of Philippine Standard on Assurance
Engagements.

3. Which statement is incorrect regarding an engagement to perform agreed-upon procedures?

a. An auditor is engaged to carry out those procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.
b. The recipients of the report must form their own conclusions from the report by the auditor.
c. The report is restricted to those parties that have agreed to the procedures to be performed.
d. The report on factual findings is expressed in the form of negative assurance.

4. Which of the following engagements provides third parties the highest level of assurance about the clients financial
statements?
a. Audit c. Agreed-upon procedures
b. Review d. Compilation

5. In which of the following situations can third parties assume responsibility of the auditor regarding association with
financial information?
a. When the auditor attaches a report to that information.
b. When the auditor consents to the use of the auditor's name in a professional connection.
c. Either a or b.
d. Neither a nor b.

6. A concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no
material misstatements in the financial statements taken as a whole.
a. Reasonable assurance c. Moderate assurance
b. Positive assurance d. Negative assurance

7. Which statement is incorrect regarding the external auditors consideration of the work of internal auditing?
a. The external auditor should consider the activities of internal auditing and their effect, if any, on external audit
procedures.
b. The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit
and developing an effective audit approach.
c. During the course of planning the audit, the external auditor should perform a preliminary assessment of the internal
audit function when it appears that internal auditing is relevant to the external audit of the financial statements in specific
audit areas.
d. When the external auditor intends to use specific work of internal auditing, the external auditor need not evaluate and
test that work to confirm its adequacy for the external auditor's purposes.

8. The independent auditor lends credibility to clients financial statements by

a. Maintaining a clear-cut distinction between managements representations and the auditors representation.
b. Testifying under oath about clients financial statements.
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c. Stating in the auditors management letter that the examination was made in accordance with generally accepted
auditing standards.
d. Attaching an auditors opinion to the clients financial statements.

9. Which of the following is responsible for the fairness of representations made in financial statements?
a. The independent auditor. c. The client's management.
b. The internal auditor. d. The audit committee.

10. The exposure period allowed for each exposure draft of PSA to be considered by the organizations and persons to
whom it is sent for comment is generally
a. Four months c. Two months
b. Three months d. Six months

11. Which statement is incorrect regarding the pronouncements of ASPC?

a. The PSAs and Interpretations may also have application, as appropriate, to other related activities of auditors.
b. PSAs contain basic principles and essential procedures (identified in bold type black lettering) together with related
guidance in the form of explanatory and other material.
c. PSAs need only be applied to material matters.
d. The Interpretations have the same authority as the PAPSs.

12. The following should be occupied only by a duly registered CPA, except
a. Any position in any business or company in the private sector which requires supervising the recording of financial
transactions.
b. Any position in any business or company in the private sector which requires preparation of financial statements.
c. Any position in any business or company in the private sector which requires coordinating with the internal auditors for
the audit of financial statements.
d. The position of the dean that supervises the BSA program of an educational institution.

13. Which of the following is not represented in the Auditing and Assurance Standards Council?
a. Board of Accountancy c. Bureau of Internal Revenue
b. Bangko Sentral ng Pilipinas d. Securities and Exchange Commission

14. A study, appraisal, or review by the BOA or its duly authorized representatives, of the quality of audit of financial
statements through a review of the quality control measures instituted by an
Individual CPA, Firm or Partnership of CPAs engaged in the practice of public accountancy.
a. Peer review c. Analytical review
b. Quality review d. Administrative review

15. Emong, CPA is applying for renewal of his professional license. He is exempted from the CPE requirements
a. If he is at least 65 years old.
b. If he is working abroad and he has been out of the country for at least two years immediately prior to the date of
renewal.
c. Either a or b.
d. Under no circumstances.

16. The following statements relate to RA 9298. Which statement is true?

a. The Professional Regulation Commission has the authority to remove any member of the Board of Accountancy for
negligence, incompetence, or any other just cause.
b. Insanity is not a ground for proceeding against a CPA.
c. A person shall be considered to be in the professional practice of accounting if, as an officer in a private enterprise, he
makes decisions requiring professional accounting knowledge.
d. After three years, subject to certain conditions, the Board of Accountancy may order the reinstatement of a CPA whose
certificate of registration has been revoked.

17. There is a need for assurance that all services obtained from a professional accountant are carried out to the highest
standards of performance. This statement relates to
a. Credibility c. Quality of Services
b. Professionalism d. Confidence

18. Indicate the normal pattern of development for a professional accountant.

I. A period of work experience.
II. High standard of general education.
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III. Specific education, training and examination in professionally relevant subjects
a. I, II, III b. II, III, I c. III, II, I d. II, I, III

19. A partner or employee of the firm serving as an officer or as a director on the board of an assurance client will most
likely create
a. Intimidation threat c. Advocacy threat
b. Self-review threat d. Familiarity threat

20. Which of the following least likely create a self-review threat?

a. A former officer, director or employee of the assurance client serve as a member of the assurance team.
b. A director, an officer or an employee of the assurance client in a position to exert direct and significant influence over
the subject matter of the assurance engagement has been a member of the assurance team or partner of the firm.
c. Assisting an audit client in matters such as preparing accounting records or financial statements.
d. A firm, or network firm, provides internal audit services to an audit client.

21. This process may include, particularly in the case of large complex audits, requesting personnel not otherwise involved
in the audit to perform certain additional procedures.
a. Direction c. Review
b. Supervision d. All of these

22. Which of the following is least likely a factor that affects the extent of quality control procedures?
a. The size of the firm. c. The number of practice offices.
b. The type of clients that the firm serves. d. The nature of the practice.

23. Which statement is incorrect regarding the auditors responsibility to consider fraud and error in the audit of financial
statements?
a. The auditor is entitled to accept records and documents as genuine.
b. The auditor is may be held responsible for the prevention of fraud and error.
c. The auditor should consider the risk of material misstatements in the financial statements resulting from fraud or error.
d. The risk of not detecting a material misstatement resulting from error is lower than the risk of not detecting a material
misstatement resulting from fraud.

24. Which statement is incorrect regarding fraud risk factors?

a. Using the auditors knowledge of the business, the auditor may identify events or conditions that provide an
opportunity, a motive or a means to commit fraud, or indicate that fraud may already have occurred.
b. A missing document, an out of balance general ledger, or an analytical procedure that does not make sense may be the
result of circumstances other than fraud.
c. Fraud risk factors indicate the existence of fraud because they often have been present in circumstances where frauds
have occurred.
d. The presence of fraud risk factors may affect the auditors assessment of inherent risk or control risk.

25. Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this
defalcation and least likely to be detected by an auditor?
a. Understating the sales journal.
b. Overstating the accounts receivable control account.
c. Overstating the accounts receivable subsidiary ledger.
d. Understating the cash receipts journal.

26. Example of the type of information that may come to the auditor's attention that may indicate that noncompliance
with laws or regulations has occurred most likely include
a. Payments for specified services or loans to consultants, related parties, employees or government employees.
b. Payments for goods or services made to the country from which the goods or services originated.
c. Purchasing at prices significantly above or below market price.
d. Sales commissions or agent's fees that appear reasonable in relation to those ordinarily paid by the entity or in its
industry or to the services actually received.

27. When the auditor knows that an illegal act has occurred, the auditor must
a. Issue an adverse opinion.
b. Withdraw from the engagement.
c. Report it to the proper government authorities.
d. Consider the effects on the financial statements, including the adequacy of disclosure.

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28. Which statement is correct regarding the auditors communications of audit matters with those charged with
governance?
a. The auditors communications of matters include all audit matters of governance interest.
b. An audit of financial statements is designed to identify all matters that may be relevant to those charged with
governance.
c. The auditors communications with those charged with governance may be made orally or in writing.
d. None of the above.

29. It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before
a. The performance of substantive testing.
b. The commencement of the engagement.
c. The completion of audit.
d. Before the issuance of audit report.

30. When a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report
based on the revised engagement (choose the incorrect one)
a. Should not contain a separate paragraph that refers to the original engagement.
b. Should not refer to any procedures that may have been performed in the original engagement.
c. Should qualify the opinion due to scope limitation.
d. Omits reference to the original engagement.

31. A basic tool used by the auditor to control the audit work and review the progress of the audit.
a. Audit program c. Engagement letter.
b. Progress flowchart d. Time and Expense Summary

32. Which of the following is not normally a planning procedure?

a. Assess the conclusions reached and the evaluation of the overall financial statement presentation through the use
analytical procedures.
b. Consider the risk of the existence of related-party transactions.
c. Consider the nature of the audit reports expected to be rendered.
d. Identify items likely to require adjustments.

33. An understanding of the clients business and industry and knowledge about the companys operations are essential
for doing an adequate audit. For a new client, most of this information
is obtained
a. From the predecessor auditor. c. At the clients premises.
b. From the SEC. d. From the permanent file.

34. The managements assessment of the entitys ability to continue as a going concern covers a period of:
a. Not longer than 12 months from balance date.
b. At least 12 months from the balance sheet date.
c. Not longer than 12 months from the date of audit report.
d. At least 12 months from the date of audit report.

35. Which of the following would an auditor most likely use in determining the auditors preliminary judgment about
materiality?
a. The results of the internal control questionnaire.
b. The contents of the management representation letter
c. The entitys annualized interim financial statements.
d. The anticipated sample size of the planned substantive tests.
36. How can the audit program best be described at the beginning of the audit process?
a. Tentative. c. Conclusive.
b. Comprehensive. d. Optional.

37. Which of the following is appropriate about risk assessment?

a. Detection risk is eliminated if an auditor were to examine 100 percent of the account balance or class of transactions
b. There is an inverse relationship between detection risk and the combined level of inherent and control risk.
c. The assessed level of inherent and control risk can be sufficiently low, thus resulting to eliminating the need for
substantive tests.
d. Audit risk may be more appropriately determined by assessing inherent and control risk separately.

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38. Which of the following shows an appropriate relationship between the acceptable level of detection risk and the
combined level of inherent and control risk?
Auditors Assessment of

Inherent Risk Control Risk Acceptable Level of Detection Risk

a. Low High Low
b. Low High Medium
c. High High Low
d. Low Low High

39. Which of the following most directly illustrates inherent risk?

a. Inadequate segregation of duties.
b. Confirmation of receivables by an auditor fails to detect a material misstatement.
c. ABC Company, a client company, lacks sufficient working capital to continue operations.
d. A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.

40. Which of the following is a valid statement about the assessment of control risk?
a. There is a positive relationship between detection risk and the combined level of inherent and control risk.
b. The auditor should consider the assessed levels of inherent and control risks in determining the nature, timing, and
extent of substantive procedures required to eliminate audit risk.
c. Misstatements discovered by conducting substantive procedures may cause the auditor to modify the previous
assessment of control risk.
d. The assessed level of inherent and control risks can be sufficiently low in order to eliminate the auditors need to
perform substantive tests on some assertions.

41. The auditor should perform which of the following as risk assessment procedure?
a. Analytical procedures c. Recalculation
b. Confirmation d. Reperformance

42. Which of the following is least likely a potential benefit of effectiveness and efficiency for an entitys internal control
that IT provides?
a. Enhance the timeliness, availability, and accuracy of information.
b. Enhance the ability to monitor the performance of the entitys activities and its policies and procedures.
c. Eliminate the risk that controls will be circumvented.
d. Consistently apply predefined business rules and perform complex calculations in processing large volumes of
transactions or data.
43. Control environment
a. Consists of the policies and procedures that help ensure that management directives are carried out.
b. Includes the governance and management functions and the attitudes, awareness, and actions of those charged with
governance and management concerning the entitys internal control and its importance in the entity.
c. Is the entitys process for identifying business risks relevant to financial reporting objectives and deciding about actions
to address those risks, and the results thereof.
d. Consists of the procedures and records established to initiate, record, process, and report entity transactions (as well
as events and conditions) and to maintain accountability for the related assets, liabilities, and equity.

44. Which of the following situations will normally result to increase in the extent of audit procedures?
a. Decrease in the risk of material misstatement.
b. Decrease in the degree of assurance the auditor plans to obtain.
c. Decrease in materiality level.
d. None of the above.

45. The auditor should determine overall responses to address the risks of material misstatement at the financial
statement level. Such responses most likely include
a. Assigning less experienced staff.
b. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence.
c. Performing predictable further audit procedures.
d. Performing substantive procedures at an interim date instead of at period end.

46. Which statement is incorrect regarding the nature, timing and extent of tests of controls?
a. Those controls subject to testing by performing inquiry combined with inspection or reperformance ordinarily provide
more assurance than those controls for which the audit evidence consists solely of inquiry and observation.

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b. If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the
operating effectiveness of such controls at least once in every third audit.
c. The length of time period between retesting controls is a matter of professional judgment, but cannot exceed three
years.
d. The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the greater is the extent
of the auditors tests of controls.

47. Which of the following statements is correct regarding the auditors primary objective in performing procedures to
obtain an understanding of the internal control structure?
a. The primary objective is to provide the auditor with an evaluation of the consistency of application of managements
policies.
b. The primary objective is to provide the auditor with knowledge necessary for audit planning.
c. The primary objective is to provide the auditor with evidential matter to use in assessing inherent risk.
d. The primary objective is to provide the auditor with a basis for modifying tests of controls.

48. Which of the following would most likely indicate internal control deficiency for the revenue cycle (including cash
receipts)?
a. Credit is granted by a credit department.
b. Cash receipts received in the mail are received by a secretary with no recordkeeping responsibility.
c. Cash is deposited weekly.
d. Cash disbursements over P100,000 does not require two signatures on the check.

49. The following statements relate directly to test of controls except

a. May involve comparisons of financial information with nonfinancial information.
b. Setting the planned assessed level of control risk at the maximum will eliminate these tests.
c. Often performed concurrently with obtaining an understanding of internal control.
d. Inquire of the accounts receivable clerk regarding the effectiveness of the computer program in updating accounts
receivable balances.

50. After obtaining an understanding of an entitys internal controls, an auditor may assess control risk at the maximum
for some assertions because the auditor:
a. Believes internal control activities are unlikely to be effective.
b. Determines that internal control is not well-documented.
c. Performs tests of controls to restrict detection of risk to an acceptable level.
d. Identifies control activities that are likely to prevent material misstatements.

51. The report of the service organization auditor on the suitability of design (Type A) will not ordinarily include an opinion
by the service organization auditor that:
a. The description of the service organization's accounting and internal control systems, ordinarily prepared by the
management of the service organization is accurate.
b. The systems' controls have been placed in operation.
c. The accounting and internal control systems are operating effectively based on the results from the tests of control.
d. The accounting and internal control systems are suitably designed to achieve their stated objectives.

52. Which statement is correct regarding the audit evidence?

a. The greater the risk, the less audit evidence is likely to be required.
b. The higher the quality, the more may be required
c. Merely obtaining more audit evidence may not compensate for its poor quality.
d. Obtaining audit evidence relating to a particular assertion is a substitute for obtaining audit evidence regarding another
assertion.

53. Assertions used by the auditor fall into three categories. Existence is included under
a. Assertions about classes of transactions and events for the period under audit.
b. Assertions about account balances at the period end.
c. Assertions about presentation and disclosure.
d. All of the above.

54. Which of the following statements is incorrect regarding the reliability of audit evidence?
a. Oral representation by the client management is not a valid evidence.
b. Audit evidence obtained directly by the auditor is more reliable than that one provided by the client management.
c. The effectiveness of accounting and internal control adds to the reliability of internal audit evidence.

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d. While internal audit evidence is considered to be acceptable, the auditor usually prefers audit evidence form external
sources.

55. Which statement is incorrect regarding the auditors attendance at physical inventory counting?
a. When inventory is material to the financial statements, the auditor should obtain sufficient appropriate audit evidence
regarding its existence and condition by attendance at physical inventory counting unless impracticable.
b. When the quantities are to be determined by a physical inventory count and the auditor attends such a count, the
auditor would ordinarily observe count procedures and perform test counts.
c. To obtain assurance that managements procedures are adequately implemented, the auditor would observe
employees procedures and perform test counts.
d. The physical inventory count cannot be conducted at a date other than period end.

56. The auditor considers the status of legal matters up to

a. The date of the audit report. c. The issuance of financial statements.
b. The balance sheet date. d. Up to the date of receipt of letter from lawyers.
57. Which statement is correct regarding valuation and disclosure of long-term investments?
a. Regardless of the amount of long-term investments, the auditor should obtain sufficient appropriate audit evidence
regarding their valuation and disclosure.
b. Audit procedures regarding long-term investments ordinarily include considering evidence as to whether the entity has
the ability to sell the investment in the near term.
c. If the carrying amounts do not exceed market quotations, the auditor would consider whether a write-down is required.
d. If there is an uncertainty as to whether the carrying amount will be recovered, the auditor would consider whether
appropriate adjustments and/or disclosures have been made.

58. In relation to opening balances, which of the following may cause the auditor to disclaim his opinion?
a. The inability of the auditor to obtain sufficient appropriate audit evidence concerning opening balances.
b. The opening balances contain misstatements that could materially affect the current periods financial statements and
such misstatements have not been corrected.
c. The current periods accounting policies have not been consistently applied in relation to opening balances and the
effect of such change is not properly accounted for or disclosed.
d. The assessed substantial doubt about the entitys ability to continue as a going concern as indicated by consistent
negative cash flows.

59. The auditor notices significant fluctuations in key elements of the company's financial statements. If management is
unable to provide an acceptable explanation, the auditor should
a. Withdraw from the engagement.
b. Consider the matter a scope limitation.
c. Perform additional audit procedures to investigate the matter further.
d. Intensify the examination with the expectation of detecting management fraud.
60. In evaluating the assumptions on which the estimate is based, the auditor would least pay particular attention to
assumptions which are
a. Subjective.
b. Sensitive to variation.
c. Susceptible to material misstatement.
d. Reasonable in light of actual results in prior periods.

61. Which statement is correct regarding auditing fair value measurements and disclosures?
a. Many measurements based on estimates, including fair value measurements, are inherently precise.
b. Assumptions used in fair value measurements are similar in nature to those required when developing other accounting
estimates.
c. Underlying the concept of fair value measurements is a presumption that the entity will be liquidated.
d. The measurement of fair value may be relatively complex for assets that are bought and sold in active and open markets.

62. The auditor needs to be aware of the existence of related parties and transactions between such parties. Which of the
following is the least likely reason?
a. GAAP in the Philippines require disclosure in the financial statements of certain related party relationships and
transactions.
b. Related parties and transactions between such parties are considered unusual features of business.
c. The source of audit evidence affects the auditor's assessment of its reliability.
d. A related party transaction may be motivated by other than ordinary business considerations.

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63. Which of the following is most likely a procedure that would be performed by the auditor regarding subsequent
events?
a. Reading the minutes of the meetings of shareholders, the board of directors and audit executive committees held
throughout the audit year.
b. Reading the entitys latest available interim financial statements.
c. Send second requests to the clients customer who failed to respond to initial accounts receivable confirmation requests.
d. Review the cutoff bank statements for several months after the year-end.

64. A client acquired 30% of its outstanding capital stock after year-end and prior to the completion of the auditors
fieldwork. The auditor should
a. Disclose the acquisition in the opinion paragraph of the auditors report.
b. Advise management to adjust the balance sheet to reflect the acquisition.
c. Issue pro forma financial statements giving effect to the acquisition as if it had occurred at year-end.
d. Advise management to disclose the acquisition in the notes to the financial statements.

65. If a representation by management is contradicted by other audit evidence, the auditor should
a. Withdraw from the engagement.
b. Investigate the circumstances and, when necessary, reconsider the reliability of other representations made by
management.
c. Issue a qualified or adverse opinion.
d. Issue a qualified or disclaimer of opinion.

66. Which statement is incorrect regarding the auditors use of the work of an expert?
a. Determination of amounts using specialized techniques or methods, for example, an actuarial valuation will likely
require the services of an expert.
b. The auditor's education and experience enable the auditor to be knowledgeable about business matters in general.
c. The auditor need not assess the objectivity of the expert since latter may be related to the entity.
d. When planning to use the work of an expert, the auditor should assess the professional competence of the expert.

67. Which statement is incorrect regarding inter-bank confirmations?

a. The requirement for bank confirmation arises from the need of the bank's management and its auditors to confirm the
financial and business relationships.
b. Inter-bank relationships are different in nature from those between the bank and a non-bank customer.
c. The auditor should decide from which bank or banks to request confirmation, have regard to such matters as size of
balances, volume of activity, degree of reliance on internal controls, and materiality within the context of the financial
statements.
d. It is not usual practice to request a response only if the information submitted is incorrect or incomplete.

68. Which statement is correct regarding small entities?

a. There is concentration of ownership and management in a small number of individuals (often a single individual).
b. An entity owned by another enterprise cannot be regarded as a small entity.
c. The meaning of small entity gives consideration only to the size of an entity.
d. Small entities do not have internal controls.

69. The inability of the client to prepare certain audit requirements may most likely lead the auditor to
a. Withdraw from the engagement.
b. Express qualified opinion or a disclaimer.
c. Express qualified or adverse opinion.
d. Express unqualified opinion with explanatory paragraph.

70. Which statement is incorrect regarding working papers?

a. The auditor should document matters which are important in providing evidence to support the audit opinion.
b. The auditor should prepare working papers which are sufficiently complete and detailed to provide an overall
understanding of the audit.
c. Portions of or extracts from the working papers may be made available to the entity at the discretion of the auditor
since working papers are substitute for the entitys accounting records.
d. Working papers would include the auditors reasoning on all significant matters which require the exercise of judgment,
together with the auditors conclusion thereon.

71. Which of the following statements about working papers is correct?

a. Working papers are not permitted to be used as a reference source by the client.
b. The auditor should document the understanding of the client's internal control obtained to plan the audit.
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c. Working papers may be regarded as a substitute for the client's accounting records.
d. When reporting on comparative financial statements, the independent auditor may discard working papers after two
years.

72. Identify as to whether sampling or nonsampling risk, following the same order:
I. The auditor might reach a different conclusion based on samples used from the conclusion if it were the entire
population subjected to the same audit procedure
II. The auditor might use inappropriate procedures
III. The auditor might misinterpret the evidence
a. Nonsampling, sampling, nonsampling
b. Sampling, nonsampling, nonsampling
c. Sampling, nonsampling, sampling
d. Nonsampling, sampling, sampling

73. Which of the following is correct about sampling risks?

a. The risk of incorrect acceptance relates to the efficiency of the audit.
b. The risk of assessing control risk too low relates to the efficiency of the audit.
c. Sampling risk includes the auditors failure to recognize errors in the documents examines for the chosen sample.
d. The likelihood of assessing control risk too high is the risk that the sample selected to test controls does not support
the auditors planned assessed level of control risk when the true operating effectiveness of the control structure justifies
such an assessment.

74. Identify the sample selection method used, following the same order:
I. Selecting items using a constant interval between selections; the first interval having a random start.
II. Selecting items from the entire population with no intention to include or exclude specific units
III. All items in the population or within each stratum have a known chance of selection
a. Systematic, random, haphazard.
b. Systematic, haphazard, random.
c. Haphazard, systematic, random.
d. Random, systematic, haphazard.

75. When sampling for attributes, which of the following would decrease sample size?

a. b. c. d.
Intended reliance internal Increase Decrease Increase Decrease
controls
Tolerable deviation rate Decrease Increase Increase Increase
Expected deviation rate Increase Decrease Decrease Decrease
Risk of assessing control risk too Decrease Increase Increase Decrease
low

76. In substantive testing, which of the following would increase sample size?
a. b. c. d.
Assessment of inherent risk Increase Increase Increase Decrease

Reliance on internal control Increase Decrease Decrease Increase

Tolerable error Decrease Increase Decrease Increase
Expected error Increase Decrease Increase Decrease
Risk of incorrect acceptance Decrease Increase Decrease Increase

77. A CIS environment least likely affects

a. The overall objective and scope of an audit.
b. The procedures followed by the auditor in obtaining a sufficient understanding of the accounting and internal control
systems.
c. The consideration of inherent risk and control risk through which the auditor arrives at the risk assessment.
d. The auditors design and performance of tests of control and substantive procedures appropriate to meet the audit
objective.

78. A CIS environment

a. Exists when a computer of any type or size is involved in the processing by the entity of financial information of
significance to the audit, whether that computer is operated by the entity or by a third party.
b. Is the electronic transmission of documents between organizations in a machine-readable form.
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c. Consists of the policies and procedures that the entity implements and the IT infrastructure (hardware, operating
systems, etc.) and application software that it uses to support business operations and achieve business strategies.
d. A communications network that serves users within a confined geographical area.

79. Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-
prepared data files rather than manually prepared files?
a. It is usually more difficult to detect transposition errors.
b. Transactions are usually authorized before they are executed and recorded.
c. It is usually easier for unauthorized persons to access and alter the files.
d. Random error associated with processing similar transactions in different ways is usually greater.

80. Gateway is
a. A hardware and software solution that enables communications between two dissimilar networking systems or
protocols.
b. A device that forwards frames based on destination addresses.
c. A device that connects and passes packets between two network segments that use the same communication protocol.
d. A device that regenerates and retransmits the signal on a network.

81. Database systems are distinguished by two important characteristics:

a. Data sharing and data independence.
b. Data dictionary and database administration.
c. Data sharing and database administration.
d. Data dictionary and data independence.

82. General CIS controls generally do not include:

I. Controls over processing and computer data files
II. Organization and management controls
III. Development and maintenance controls
IV. Delivery and support controls
V. Monitoring controls
VI. Controls over input
VII. Controls over output
a. All of the above c. I, II, III, IV and V
b. II, III, IV and V d. I, VI and VII

83. An auditor anticipates assessing control risk at a low level in a computerized environment. Under these circumstances,
on which of the following procedures would the auditor initially focus?
a. Programmed control procedures c. Application control procedures
b. Output control procedures d. General control procedures

84. Which of the following is not explicitly included in the opening paragraph of an audit report?
a. Identification of the financial statements that have been audited.
b. A statement by the auditor that the audit provides a reasonable basis for the opinion.
c. Statement that the financial statements are the responsibility of the entitys management.
d. Statement that the responsibility of the auditor is to express an opinion on the financial statements based on his audit.

85. Which of the following is least likely a description of audit contained in the scope paragraph of the auditors report?
a. Examining evidence to support the financial statement amounts and disclosures.
b. Assessing the accounting principles used in the preparation of the financial statements.
c. Assessing the significant estimates made by management in the preparation of the financial statements.
d. Evaluating the overall financial statement presentation.

86. The auditor issued a qualified opinion covering the financial statements of Client A for the year ended December 31,
2004. The reason for the qualification was a departure from GAAP. In presenting comparative statements for the years
ended December 31, 2004 and 2005, the client revised the 2004 financial statements to correct the previous departure
from GAAP. The auditor's 2005 report on the 12/31/04 and 12/31/05 comparative financial statements will
a. Express unqualified opinions on both the 2004 and 2005 financial statements.
b. Express a qualified opinion on the 2004 financial statements and an unqualified opinion on the 2005 statements.
c. Retain the qualified opinion covering the 2004 statements, but add an explanatory paragraph describing the correction
of the prior departure from GAAP.
d. Render qualified audit opinions for both 2004 and 2005 financial statements given the 2005 carryover effect of the 2004
error.
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87. When the financial statements of the prior period were not audited, the incoming auditor should:
a. Insist that an audit of prior years financial statements must be made.
b. Obtain sufficient appropriate audit evidence that the corresponding figures meet the requirements of the relevant
financial reporting framework.
c. Not allow the inclusion of the corresponding figures in the financial statements of the current period.
d. Disclaim his opinion and treat the unaudited corresponding figures as basis of scope limitation.

88. When a misstatement in the financial statements exists, but is unlikely to affect the decisions of a reasonable user, it
would be appropriate to issue
a. An unqualified opinion. c. A qualified opinion.
b. A disclaimer of opinion. d. An adverse opinion.

89. The audit report date is important to users because it indicates the
a. Last day of the fiscal period.
b. Last day of the auditors responsibility for the review of significant events that occurred after the date of the financial
statements.
c. Date on which the financial statements were filed with the SEC.
d. Last day on which users may institute a lawsuit either client or auditor.

90. When the principal auditor concludes that the work of the other auditor cannot be used and the principal auditor has
not been able to perform sufficient additional procedures regarding the financial information of the component audited
by the other auditor, the principal auditor will likely issue
a. Unqualified opinion.
b. Unqualified opinion with explanatory paragraph
c. Qualified or adverse opinion
d. Qualified or disclaimer of opinion

91. When there is a limitation on the scope of the audit that results to a disclaimer of opinion, the three paragraphs of the
auditor report are:
Introductory Scope Opinion
a. Modified Modified Modified
b. Unmodified Modified Modified
c. Unmodified Unmodified Modified
d. Modified Unmodified Modified

92. If an amendment to other information in a document containing audited financial statements is necessary and the
entity refuses to make the amendment, the auditor would most likely issue
a. Unqualified opinion.
b. Unqualified opinion with explanatory paragraph
c. Qualified or adverse opinion
d. Qualified or disclaimer of opinion

93. The auditors report on summarized financial statements should include

a. An opinion as to whether the information in the summarized financial statements is presented fairly, in all material
respects.
b. An opinion as to whether the information in the summarized financial statements is consistent with the audited financial
statements from which it was derived.
c. A statement of negative assurance.
d. A description of the auditors factual findings including sufficient details of errors and exceptions found.

94. A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with
specified requirements should contain:
a. A statement of limitations on the use of the report.
b. An opinion about whether management's assertion is fairly stated.
c. Negative assurance that control risk has not been assessed.
d. An acknowledgment of responsibility for the sufficiency of the procedures.

95. Which of the following procedures does an accountant in a compilation engagement of a nonpublic entity ordinarily
perform?
a. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting
principles.
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b. Obtaining written representations from management indicating that the compiled financial statements will not be used
to obtain credit.
c. Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors.
d. Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial
statement components.

96. Which of the following should the auditor perform in a review engagement?
a. Understand matters that are relevant to the financial statements.
b. Understand the entitys internal control system.
c. Observe the physical count of inventory.
d. Inquire of legal counsel of pending litigations.

97. An auditors report on financial statements prepared in accordance with another comprehensive basis of accounting
should include all of the following except:
a. An opinion as to whether the basis of accounting used is appropriate under the circumstances.
b. An opinion as to whether the financial statements are presented fairly in conformity with the comprehensive basis of
accounting.
c. Reference to the note to the financial statements that describes the basis of presentation.
d. A statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted
accounting principles.

98. An auditor's report would be designated as a special report when it is issued in connection with financial statements
that are
a. For an interim period and are subjected to a limited review.
b. Unaudited and are prepared from a client's accounting records.
c. Prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles.
d. Purported to be in accordance with generally accepted accounting principles but do not include a presentation of the
Statement of Cash Flows.

99. Eddie Lares, a partner in a CPA firm performs free accounting service for a club of which he is a treasurer. The most
preferable way for Lares to issue the yearly statements of the club is
a. On the firm's letterhead with a disclaimer on lack of independence.
b. On the firm's letterhead with the caption that the statement is unaudited.
c. On the club's letterhead with Lares signing as treasurer.
d. On plain paper with no reference to Lares as a CPA.

100. The CPA who regularly examines the Marcos corporate financial statements was asked to prepare pro forma income
statements for the next three years based on the corporation's operating assumptions for the internal use of the client.
The CPA should
a. Reject the engagement since the statements are to be based on assumptions.
b. Reject the engagement because the statements are for internal use only.
c. Accept the engagement provided full disclosure is made of the assumptions used and the extent of the responsibility of
the CPA.
d. Accept the engagement provided the president of Marcos Corp. certifies in writing that the statement will be solely for
internal use.

God bless!

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